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Nationalizing Public Transport

Most of us take some form of public transport every day. The diverse mix of buses, trains and taxis ply along our intricate road and rail networks to sweep us from point to point in our daily commutes. But are we really satisfied with the current privatized transport system? Or is this an issue larger than transport itself? Supporters of the system will gently remind us to compare our relatively well-oiled machine with transport woes in other countries, while persistent dissenters will argue that the first-world nation deserves a more efficient, less crowded and cheaper set of public wheels.

The debate has been raging on. I will re-post here both Transport Minister Lui Tuck Yew’s comments about the Worker’s Party proposals to nationalize and the Online Citizen’s response to the minister.

Lui Tuck Yew: Nationalized Public Transport Won’t Run Well

Both SBS Transit and SMRT have submitted their proposals to the Public Transport Council (PTC) to raise fares. This has generated some responses, including a suggestion for our public transport system to be nationalised.

While this might seem like a very attractive idea, in reality, it has serious downsides, chief amongst which commuters and taxpayers (yes, even those who don’t take public transport) are likely to end up paying more, and possibly, for a poorer level of service over time.

A nationalised public transport operator that depends on government funding and which operates on a cost recovery basis would have little incentive to keep costs down. Cost increases will be passed on to commuters.

Over time, this will lead to higher costs for the same level of service, which means commuters pay higher, and not lower fares. Not only would people have to pay more, nationalising the operators could result in a stagnation of service quality or efficiency over time.

On the other hand, it is the profit incentive of commercial enterprises that spurs efficiency and productivity improvements. This is the reason why many cities around the world have moved or are moving towards having commercial enterprises provide public transport services.

Some people have said that the public transport operators (PTOs) should not be making so much profit, although we should also recognise that as public-listed companies, it is not unreasonable for the PTOs to earn fair returns from the sizeable capital investments required to sustain their operations and to invest in future public transport needs.

What is important is to ensure that commuters’ interests are safeguarded even as we have commercial enterprises run the public transport services.

Let me highlight the key aspects.

First, we have a robust framework to regulate bus and rail service levels through service quality and operating performance standards so that PTOs do not pursue profit at the expense of commuters. LTA will also continue to work with the PTOs to deliver improvements to the public transport system.

Second, the PTC regulates fares based on a fare adjustment formula (0.5 CPI + 0.5 WI -1.5%) that takes into account macro-economic factors, namely the Consumer Price Index (CPI) and average national wage increases, while delivering a productivity dividend to commuters. The fare adjustment formula protects commuters by capping fare increases – PTOs are not free to simply pass on their cost increases to commuters.

As in previous years, the PTC will have to deliberate on the PTOs’ fare revision proposals bearing in mind the interests of commuters and the sustainability of our public transport system. In fact, there have been some years when the PTC approved fare increases that have been less than what the PTOs proposed but we should let the PTC deliberate on this properly and make its decision.

These two elements have enabled us to put in place an efficient, cost-effective and financially sustainable public transport system. Certainly, there are areas for further improvement so we can deliver a high quality public transport system, and I welcome your inputs and feedback.

Finally, the Government has invested heavily in our public transport infrastructure and we will continue to do so. On the rail network alone, we have invested about $20 billion in the existing rail network infrastructure and will be investing another $60 billion in new rail lines by the end of the decade.

Government funding of public transport infrastructure is a key reason why public transport fares continue to be affordable.

TOC: A Response to Transport Minister on Public Transport System in Singapore

On July 11, 2011, the two major Public Transport Operators (PTOs), SBS Transit and SMRT, submitted their proposals to the Public Transport Council (PTC) to raise fares, raising eyebrows among Singaporeans who have been unhappy with the service of the PTOs over the years. The Workers’ Party then reiterated a call that was made in the 2006 and 2011 polls to nationalise the PTOs to oversee and run major transport services.

However, Singapore’s Transport Minister, Mr. Lui Tuck Yew, has come forward to defend the current transport arrangement and rejected the idea of nationalizing the PTOs. Mr. Lui has mentioned that “the Workers’ Party proposal for the public transport system to be nationalised has serious downsides, chief amongst which commuters and taxpayers, including those who do not take public transport, are likely to end up paying more, and possibly, for a poorer level of service over time”.

“Paying more …for a poorer level of service over time”While this is Mr Lui’s gloomy prognosis of a transport system with a nationalised operator, I hasten to point out that EVEN in the current situation, with a privatised operator (SMRT), we commuters are already facing a similar situation – massive overcrowding, more frequent breakdowns, poor management during breakdowns and security lapses, and yet, constant increase in transport fares. Also, for those who do not use public transport, they are also paying, not in pecuniary terms, but the cost of traffic congestion which is due to more cars on the road, and which in turn and in part to people preferring to drive because of dissatisfaction with public transport services.

Mr. Lui has also mentioned that a nationalised public transport operator that depends on government funding and which operates on a cost recovery basis would have little incentive to keep costs down. Cost increases will be passed on to commuters. We are not given evidence of how these PTOs have “kept costs down”. However, if what Mr. Lui said is true, why would a company that has successfully managed (or even reduced) its costs and is making decent profits (ref SMRT’s annual reports) over the years need to constantly apply for increment in fares?

The Privatised PTOs and PerformanceAnother important issue pointed out by Mr. Lui is that over time, a nationalised PTO will lead to higher costs for the same level of service, which means commuters pay higher, and not lower fares and hence, not only would people have to pay more but nationalising the operators could result in a stagnation of service quality or efficiency over time. Mr. Lui’s argument here seems somewhat simplistic.

Firstly, what Mr. Lui has stated is an exact reflection of what commuters are currently facing. Since the SMRT started operating, Singapore commuters have been paying higher fares over time with somewhat same level of service. The improvement in frequency of trains does not commensurate with the rapid increase in population due to influx of non-Singaporeans. Although much evidence on successful privatization and deregulation of common state-owned enterprises are available, our current private transport operators have displayed stagnation of service quality with constant increment in fares.

Hence, even with private PTOs, commuters in Singapore are facing similar problems in a nationalised PTO. In terms of efficiency, it depends on which definition of efficiency you are referring to, in which we shall discuss in the next section.

Most people who are well-trained in economics will agree with Mr. Lui that the profit incentive of commercial enterprises will spur privately-run PTOs’ efficiency and productivity improvements, and it is the main reason many cities around the world have use commercial enterprises to provide public transport services. In economics, there are two main types of efficiencies: allocative efficiency and productive efficiency.

Allocative efficiency means that economic resources are being used in the production of goods and services that the public most desire, while productive efficiency refers to the fact that total output or service of a firm is achieved at the lowest possible cost for economic resources (this is sometimes referred to as X-efficiencies). Basic economics suggest that competition will result in both efficiencies gained.

However, the common agreement in the academic sector on such potential efficiency gains (for example, Estache, 2001) from privatising a public service such as public transport system rests fundamentally on the competition criteria. As evident, the profit incentive of commercial enterprises that spurs efficiency and productivity rests critically on the assumption of existing competition, or even the threat of potential competitors. Hence, this argument cannot be applied in Singapore’s context because there is no existing competition for the PTOs.

The World Is Not EnoughMr. Lui also disagreed with some people who said that the PTOs should not be making so much profit, and that we should recognise that as public-listed companies, it is not unreasonable for the PTOs to earn fair returns from the sizeable capital investments required to sustain their operations and to invest in future public transport needs.

However, this is exactly what makes a privately-run PTO incentive incompatible with the social objective of providing good and affordable transport service to the public, especially when it operates in an environment without competition. In this case, it is difficult to determine what constitutes a fair return to the PTO. When the SMRT makes hundreds of millions in profits, pays its senior executive million-dollar salaries and still attempt to increase fares year after year (even in the year of the occurrence of the serious security lapse at the Changi depot), it is very difficult to justify to the public that SMRT practices corporate social responsibility.

Without competitive pressure, the incentive structure of a public listed company does not equate with the social objective of providing fundamental public services such as the transport system.

A Robust Framework To Regulate Bus And Rail Service?Mr. Lui is right that it is important is to ensure that commuters’ interests are safeguarded when we have commercial enterprises running the public transport services. However, the key aspects highlighted by Mr. Lui that are being used to safeguard commuter’s interest are apparently not working well.

Firstly, let’s look at the performance record of the Public Transport Council (PTC) which has been set up to safeguard the interests of the commuters. The PTC fined SMRT a meagre sum of $100 for its service lapse in April 2010. Later in the year, the PTC was fined $50,000 (the maximum) for an extremely serious security lapse at the Changi depot but this was a paltry sum compared to the many human lives it could have cost.

In contrast, commuters could be fined $20 for non-payment or underpayment of correct fares and $50 for misuse of concession fares (PTC website).

The juxtaposition of these incidents seems to indicate that PTC tends to be more lenient towards the MRT than the general commuter. Put together with the fact that fare increases are being approved by the PTC year on year, it is difficult not to be suspicious over the claim that PTC is safeguarding public welfare.

Secondly, consider the formula used by the PTC (as revealed by Mr. Lui) to cap fare increments. If we look at the consumption weights of the CPI, transport spending contributes a significant proportion of the expenditure weights in the computation of CPI. In 2009, the transport expenditure is 16 percent, which is the third largest item in the basket of goods in CPI and shares the same spot with “recreation and others”. What this means is that fare increases are justified on the basis of previous fare increases!

In addition, the share of transport cost in CPI (16%) is not insignificant. Retaining transport cost in the CPI, and using that in the adjustment formula, will thus contribute to an upward spiral of fare increment. The use of the average national wage increment is even less desirable, since the number could simply increase to large increase in very high-income earners (such as banking executives, lawyers, doctors, etc). The average national wage is in fact a very poor indicator of the true earnings of average Singapore people, given the high income inequality as measured by the Gini coefficient (according to the Singapore department of Statistics, the Gini coefficient based on Original Income from Work per Household Member is 0.481 in 2008, 0.478 in 2009, and 0.480 in 2010).

ConclusionGiven the recent dismal performance of the PTOs, their attempt to apply for a transport fare increment is a signal of a monopolistic transport system in Singapore which is driven by the relentless quest for higher profits. All the various awards given to the SMRT or Transport Ministry is meaningless if it fails to reflect the true sentiments of the commuters.

Hence, the Transport Ministry should seriously discuss the possibilities of nationalising the PTOs plan offered by the Workers’ Party. Being aware of the downside of regulations or de-privatization, the PAP government should work together with the Worker’s party in designing a nationalization plan that can balance the social objective and the long-term sustainable operation of the PTOs.

Instead of totally abolishing the current system, the transport ministry could also consider reforming the current PTC system. Instead of having a council full of wealthy directors and highly-paid academicians, the PTCs should include at least 50 percent of its council members from alternative parties, who can better represent the voices of the average income-earners in Singapore who are main users of public transport.

As the Singapore government has always prided itself as a unique government in the world, I believe that Singapore can be the first successful example of de-privatization.